Lincoln Financial Group Reports Fourth Quarter and Full Year 2018 Results

2 weeks ago

Full year net income EPS of $7.40, down 20% and adjusted operating
EPS of $8.48, up 9%

Fourth quarter net income EPS of $1.80 and adjusted operating EPS of
$2.15

Positive net flows in both variable and fixed annuities for the
fourth quarter

$2.5 billion of capital deployed in 2018, including $605 million in
the fourth quarter

RADNOR, Pa.–(BUSINESS WIRE)–Lincoln Financial Group (NYSE: LNC) today reported net income for the
fourth quarter of 2018 of $399 million, or $1.80 per diluted share
available to common stockholders, compared to net income in the fourth
quarter of 2017 of $816 million, or $3.67 per diluted share available to
common stockholders. Fourth quarter adjusted income from operations was
$475 million, or $2.15 per diluted share available to common
stockholders, compared to $440 million, or $1.98 per diluted share
available to common stockholders, in the fourth quarter of 2017.

Net income for the full year of 2018 was $1.6 billion, or $7.40 per
diluted share available to common stockholders, compared to $2.1
billion, or $9.22 per diluted share available to common stockholders in
2017. Full year 2018 adjusted income from operations was $1.9 billion,
or $8.48 per diluted share available to common stockholders, compared to
$1.8 billion, or $7.79 per diluted share, available to common
stockholders, for the full year of 2017.

Net income in the prior-year quarter and full year 2017 included
non-recurring net favorable items of $417 million primarily related to
tax reform.

“Fourth quarter adjusted operating EPS growth of 9% and ROE of 13.5%
were strong and consistent with our record full-year results,” said
Dennis R. Glass, president and CEO of Lincoln Financial Group.
“Significant accomplishments this past year include restoring positive
flows in the Annuities business, outperforming our expectations for the
Liberty acquisition, and executing on strategic transactions, which
resulted in $2.5 billion of capital deployment. Given our positive
momentum, we remain well positioned to drive long-term shareholder
value.”

As of or For the

Quarter Ended

December 31

As of or For the

Year Ended

December 31

(in millions, except per share data)

2018

2017

2018

2017

Net Income (Loss)

$

399

$

816

$

1,641

$

2,079

Net Income (Loss) Available to Common Stockholders

387

818

1,623

2,086

Net Income (Loss) per Diluted Share Available to Common Stockholders

1.80

3.67

7.40

9.22

Revenues

4,531

3,669

16,424

14,257

Adjusted Income (Loss) from Operations

475

440

1,880

1,754

Adjusted Income (Loss) from Operations per Diluted Share Available
to Common Stockholders

2.15

1.98

8.48

7.79

Average Diluted Shares

215.0

221.9

219.6

226.2

ROE, including AOCI (Net Income)

10.9%

19.4%

10.6%

13.2%

Adjusted Operating ROE, excluding AOCI (Income from Operations)

13.5%

12.8%

13.5%

13.1%

Book Value per Share, Including AOCI

$

69.71

$

79.43

$

69.71

$

79.43

Book Value per Share, Excluding AOCI

67.73

64.62

67.73

64.62

Operating Highlights – Full Year 2018 versus Full Year 2017

Adjusted operating EPS up 9%, or 13% excluding notable items

Adjusted operating ROE, excluding AOCI, of 13.5%, up 40 basis points

Total Annuity sales of $12.4 billion, up 42%, and achieved positive
net flows in the fourth quarter

Life insurance expense ratio of 6.8%, a 90 basis point improvement

Retirement Plan Services net flows of $2.5 billion, up 76%

Group Protection after-tax margin of 5.5%, up 30 basis points

There were no notable items within adjusted income from operations for
the current quarter while the full year included approximately $0.01 of
net unfavorable items per share primarily related to the company’s
annual review of DAC and reserve assumptions. In the prior-year quarter,
there were no notable items within adjusted income from operations while
the full year included approximately $0.29 of net favorable items per
share related primarily to tax adjustments unrelated to tax reform.

Fourth Quarter 2018 – Segment Results

Annuities

The Annuities segment reported income from operations of $258 million
compared to $265 million in the prior-year quarter, as a lower reported
tax rate as a result of tax reform was more than offset by a decrease in
average account values driven primarily by the Athene reinsurance
transaction completed in the fourth quarter.

Total annuity deposits of $3.8 billion were up 35% from the prior-year
quarter as both variable and fixed annuities benefitted from product and
distribution expansion. Variable annuity sales were up 15% versus the
prior-year quarter and fixed annuity sales increased 102% over the same
period.

Net flows were $675 million in the quarter, which included positive
flows from both variable and fixed annuities, compared to net outflows
of $222 million in the prior-year period.

For the full year, total annuity sales of $12.4 billion increased 42%
versus the prior year. Net outflows of $139 million for the year
improved from $2.7 billion in 2017. As a result of the reinsurance
transaction in the fourth quarter, average account values decreased 8%
from the prior-year period but increased 2% for the full year.

Retirement Plan Services

Retirement Plan Services reported income from operations of $45 million,
up 10% compared to the prior-year quarter. The growth in earnings is
attributable to a lower reported tax rate as a result of tax reform and
lower expenses.

Total deposits for the quarter of $2.2 billion were down 11% while
deposits for the full year increased 18% to $10.1 billion driven by a
32% increase in first-year sales and 8% growth in recurring deposits.

Net flows totaled $173 million in the quarter compared to $440 million
in the prior-year period. For the full year, net flows totaled $2.5
billion, up 76% compared to the prior year. Average account values of
$70 billion were up 5% from the prior-year quarter primarily driven by
positive net flows.

Life Insurance

Life Insurance reported income from operations of $175 million, up 15%
versus the prior-year quarter. The increase in earnings is primarily
attributable to stronger variable investment income and a lower reported
tax rate as a result of tax reform, partially offset by unfavorable
mortality.

Total Life Insurance sales were $262 million, up 8% from the prior-year
quarter driven by growth in VUL, IUL, UL and term. For the full year,
sales were $764 million compared to $798 million in the prior year as a
2% increase in total individual life insurance sales was offset by a
decline in executive benefit sales, which can fluctuate.

Total Life Insurance in-force of $744 billion grew 3% over the
prior-year quarter, and average account values of $50 billion increased
3% over the prior-year quarter.

Group Protection

Group Protection income from operations was $50 million in the quarter
compared to $20 million in the prior-year period. The increase in
earnings was primarily attributable to the acquisition of the Liberty
Mutual group benefits business and a lower reported tax rate as a result
of tax reform.

The total loss ratio was 76% in the current quarter as underlying claims
results remained favorable even when including typical seasonality in
the disability product line. The quarterly and full-year loss ratios
increased year over year due to combining two blocks of business with
different loss characteristics.

Group Protection sales of $272 million in the quarter were up 3% versus
the prior-year quarter. Full year sales of $580 million were up 15%
primarily driven by the acquisition. Employee-paid sales were 42% of
total sales in 2018.

Insurance premiums were $1 billion in the quarter, up 100% from the
prior-year period, driven by both the acquisition and continued growth.

Other Operations

Other Operations reported a loss from operations of $53 million versus a
loss of $38 million in the prior-year quarter. The decrease in earnings
is primarily attributable to lower tax benefits on pre-tax losses as a
result of tax reform.

Realized Gains and Losses / Impacts to Net Income

Realized gains/losses and impacts to net income (after-tax) in the
quarter were predominantly driven by:

A $37 million loss from general account investments, including $15
million from the mark-to-market on equity investments.

A $20 million acquisition and integration expense.

A $3 million variable annuity net derivative gain.

Unrealized Gains and Losses

The company reported a net unrealized gain of $1.6 billion, pre-tax, on
its available-for-sale securities at December 31, 2018. This compares to
a net unrealized gain of $7.8 billion at December 31, 2017, with the
year-over-year decrease primarily driven by higher rates and wider
spreads.

Capital

During the quarter, the company repurchased 9.1 million shares of stock
at a cost of $535 million. The quarter’s average diluted share count of
215.0 million was down 3% from the fourth quarter of 2017, the result of
repurchasing 13.2 million shares of stock at a cost of $810 million
since December 31, 2017.

Book Value

As of December 31, 2018, book value per share, including accumulated
other comprehensive income (“AOCI”), of $69.71 decreased 12% from a year
ago. Book value per share, excluding AOCI, of $67.73 increased 5% from
the prior-year period.

The tables attached to this release define and reconcile the non-GAAP
measures adjusted income from operations, adjusted operating return on
equity (“ROE”) and book value per share, excluding AOCI, to net income,
ROE and book value per share, including AOCI, calculated in accordance
with GAAP.

This press release may contain statements that are forward-looking, and
actual results may differ materially, especially given the current
economic and capital market conditions. Please see the Forward Looking
Statements – Cautionary Language at the end of this release for
additional factors that may cause actual results to differ materially
from our current expectations.

For other financial information, please refer to the company’s fourth
quarter 2018 statistical supplement available on its website, www.lfg.com/earnings.

Lincoln Financial Group will discuss the company’s fourth quarter
results with investors in a conference call beginning at 10:00 a.m.
Eastern Time on Thursday, February 7, 2019. The conference call will be
broadcast live through the company website at www.lfg.com/webcast.
Please log on at least fifteen minutes prior to the call to register and
download any necessary streaming media software. To participate via
phone: (866) 394-4575 (U.S./Canada) or (678) 509-7536 (International).
Ask for the Lincoln National Conference Call.

A replay of the call will be available by 1:00 p.m. Eastern Time on
February 7, 2019 at www.lfg.com/webcast.
Audio replay will be available from 1:00 p.m. Eastern Time on February
7, 2019 through 12:00 p.m. Eastern Time on February 14, 2019. To access
the re-broadcast, dial: (855) 859-2056 (Domestic) or (404) 537-3406
(International). Enter conference code: 5964129.

About Lincoln Financial Group

Lincoln Financial Group provides advice and solutions that help empower
people to take charge of their financial lives with confidence and
optimism. Today, more than 17 million customers trust our retirement,
insurance and wealth protection expertise to help address their
lifestyle, savings and income goals, as well as to guard against
long-term care expenses. Headquartered in Radnor, Pennsylvania, Lincoln
Financial Group is the marketing name for Lincoln National Corporation
(NYSE:LNC) and its affiliates. The company had $238 billion in assets
under management as of December 31, 2018. Lincoln Financial Group is a
committed corporate citizen included on major sustainability indices
including the Dow Jones Sustainability Index North America and
FTSE4Good. Additionally, Lincoln is dedicated to upholding a diverse and
inclusive organization and was recognized by Forbes as one of the Best
Large Employers, Best Employers for Diversity, and Best Employers for
Women and received a perfect score of 100 percent in 2018 on both the
Corporate Equality Index and Disability Equality Index. Learn more at: www.LincolnFinancial.com.
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Explanatory Notes on Use of Non-GAAP Measures

Management believes that adjusted income from operations, adjusted
operating return on equity and adjusted operating revenues better
explain the results of the company’s ongoing businesses in a manner that
allows for a better understanding of the underlying trends in the
company’s current business because the excluded items are unpredictable
and not necessarily indicative of current operating fundamentals or
future performance of the business segments, and, in most instances,
decisions regarding these items do not necessarily relate to the
operations of the individual segments. Management also believes that
using book value excluding accumulated other comprehensive income (AOCI)
enables investors to analyze the amount of our net worth that is
primarily attributable to our business operations. Book value per share
excluding AOCI is useful to investors because it eliminates the effect
of items that can fluctuate significantly from period to period,
primarily based on changes in interest rates.

For the historical periods, reconciliations of non-GAAP measures used in
this press release to the most directly comparable GAAP measure may be
included in this Appendix to the press release and/or are included in
the Statistical Reports for the corresponding periods contained in the
Earnings section of the Investor Relations page on our website: www.lfg.com/investor.

Definitions of Non-GAAP Measures Used in this
Press Release

Adjusted income (loss) from operations, adjusted operating revenues and
adjusted operating return on equity (including and excluding average
goodwill within average equity), excluding AOCI, using annualized
adjusted income (loss) from operations are financial measures we use to
evaluate and assess our results. Adjusted income (loss) from operations,
adjusted operating revenues and adjusted operating return on equity
(“ROE”), as used in the earnings release, are non-GAAP financial
measures and do not replace GAAP net income (loss), revenues and ROE,
the most directly comparable GAAP measures.

Adjusted Income (Loss) from Operations

We exclude the after-tax effects of the following items from GAAP net
income (loss) to arrive at adjusted income (loss) from operations:

Realized gains and losses associated with the following (“excluded
realized gain (loss)”):

Change in the fair value of the derivatives we own to hedge our
guaranteed death benefit (“GDB”) riders within our variable
annuities, which is referred to as “GDB derivatives results”;

Change in the fair value of the embedded derivatives of our
guaranteed living benefit (“GLB”) riders within our variable
annuities accounted for under the Derivatives and Hedging and the
Fair Value Measurements and Disclosures Topics of the Financial
Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) (“embedded derivative reserves”), net of the
change in the fair value of the derivatives we own to hedge the
changes in the embedded derivative reserves, the net of which is
referred to as “GLB net derivative results”;

Changes in the fair value of the embedded derivative liabilities
related to index call options we may purchase in the future to
hedge contract holder index allocations applicable to future reset
periods for our indexed annuity products accounted for under the
Derivatives and Hedging and the Fair Value Measurements and
Disclosures Topics of the FASB ASC (“indexed annuity
forward-starting option”);

Amortization of deferred gains arising from the reserve charges on
business sold through reinsurance; and

Revenue adjustments from the initial adoption of new accounting
standards.

Adjusted Operating Return on Equity

Adjusted operating return on equity measures how efficiently we generate
profits from the resources provided by our net assets.

It is calculated by dividing annualized adjusted income (loss) from
operations by average equity, excluding accumulated other
comprehensive income (loss) (“AOCI”).

Management evaluates return on equity by both including and excluding
average goodwill within average equity.

Definition of Notable Items

Adjusted income (loss) from operations, excluding notable items, is a
non-GAAP measure that excludes items which, in management’s view, do not
reflect the company’s normal, ongoing operations.

We believe highlighting notable items included in adjusted income
(loss) from operations enables investors to better understand the
fundamental trends in its results of operations and financial
condition.

Book Value Per Share Excluding AOCI

Book value per share excluding AOCI is calculated based upon a non-GAAP
financial measure.

It is calculated by dividing (a) stockholders’ equity excluding AOCI
by (b) common shares outstanding.

We provide book value per share excluding AOCI to enable investors to
analyze the amount of our net worth that is primarily attributable to
our business operations.

Management believes book value per share excluding AOCI is useful to
investors because it eliminates the effect of items that can fluctuate
significantly from period to period, primarily based on changes in
interest rates.

Acquisition and integration costs related to mergers and
acquisitions, after-tax

(20)

–

(67)

–

Gain (loss) on early extinguishment of debt

–

–

(18)

(3)

Adjusted Income (Loss) from Operations

$

475

$

440

$

1,880

$

1,754

Earnings (Loss) Per Common Share — Diluted

Net income (loss)

$

1.80

$

3.67

$

7.40

$

9.22

Adjusted income (loss) from operations

2.15

1.98

8.48

7.79

Average Stockholders’ Equity

Average equity, including average AOCI

$

14,710

$

16,818

$

15,517

$

15,796

Average AOCI

622

3,044

1,602

2,454

Average equity, excluding AOCI

14,088

13,774

13,915

13,342

Average goodwill

1,769

1,820

1,613

2,160

Average equity, excluding AOCI and goodwill

$

12,319

$

11,954

$

12,302

$

11,182

Return on Equity, Including AOCI

Net income (loss) with average equity including goodwill

10.9%

19.4%

10.6%

13.2%

Adjusted Operating Return on Equity, Excluding AOCI

Adjusted income (loss) from operations with average equity
including goodwill

13.5%

12.8%

13.5%

13.1%

Adjusted income (loss) from operations with average equity
excluding goodwill

15.4%

14.7%

15.3%

15.7%

(1)

The numerator used in the calculation of our diluted EPS is adjusted
to remove the mark-to-market adjustment for deferred units of LNC
stock in our deferred compensation plans if the effect of equity
classification would result in a more dilutive EPS.

(2)

We use our prevailing federal income tax rates of 21% and 35%, where
applicable, while taking into account any permanent differences for
events recognized differently in our financial statements and
federal income tax returns when reconciling our non-GAAP measures to
the most comparable GAAP measure.